Compensation for investors in certain cases of stock market: Practice and recommendations

Compensation for investors in certain cases of stock market: Practice and recommendations

Difficulties in determining investor damages

Recently, the Investigative Police Agency of the Ministry of Public Security issued Supplementary Investigation Conclusions on criminal offenses including 'Stock Market manipulation,' 'Property appropriation through deception,' 'Abuse of position or power while performing official duties,' and 'Intentional dissemination of false information or concealment of information in securities activities,' occurring at FLC Group Corporation and related entities.

According to the supplementary investigation conclusions, the Investigative Police Agency of the Ministry of Public Security stated that there were complaints from 685 investors accusing Trinh Van Quyet and accomplices of 'Stock Market manipulation,' while also requesting compensation for damages related to 6 securities codes of the FLC group.

About these letters, in the supplementary investigation conclusions, the Investigative Police Agency of the Ministry of Public Security stated that they had classified and processed them according to regulations. Specifically, concerning investors who purchased ROS shares of FLC Faros Construction Joint Stock Company, the investigative agency noted that they had classified the statements, recorded testimonies, and identified the victims in the case of 'Property appropriation through deception.

Of note, regarding investors who purchased AMD, ART, HAI, GAB, and FLC stocks, the investigative agency concluded that there was insufficient evidence to consider for resolution due to a lack of grounds to determine the damages caused by Trinh Van Quyet and his accomplices ' Stock Market manipulation' activities, according to the assessment conclusion dated October 23, 2023, by the Ministry of Finance.

What is remarkable is that this is not the only case of Stock market manipulation where authorities have been unable to determine the actual damages suffered by investors due to the manipulative actions of the perpetrators.

Before this, in the case of stock market manipulation at Louis Holdings Company and Trí Việt Securities Company, the trial panel sentenced Đỗ Thành Nhân to 5 years and 6 months in prison for the offense of stock market manipulation.

In this case, the prosecuting authorities also failed to identify the victims, the stock investors whose shares were manipulated, and the actual damages suffered by the investors. Therefore, besides the prison sentences for the defendants, the civil liability in this criminal case was pronounced as follows: 'The trial panel noted that the illegally gained amount of over 154 billion dong by the defendants needs to be recovered to replenish the public treasury.

According to legal regulations, all actual damages caused by illegal acts must be fully and promptly compensated. Specifically, according to Article 584, clause 1 of the 2015 Civil Code: "Anyone who infringes upon the life, health, dignity, reputation, honor, property, rights, or legitimate interests of others causing damage must compensate, except as otherwise provided by this Code or other relevant laws."

The law stipulates that all actual damages caused by legal violations must be fully and promptly compensated. Specifically, according to Article 584, clause 1 of the Civil Code 2015: 'Anyone who infringes upon the life, health, dignity, honor, reputation, property, rights, or other lawful interests of others causing damages must compensate, except as otherwise provided by this Code or other relevant laws.

However, looking at the two cases mentioned above, the lack of sufficient evidence to determine the damages caused by the "stock market manipulation" activities of Trinh Van Quyet, Do Thanh Nhan, and their accomplices has raised concerns about the protection of investors' rights in certain investment and business activities, particularly in the securities trading sector. This prompts the question: “what are the reasons?”.

There are many reasons

In an exchange with the reporter from the "Legal Magazine", Lawyer Le Cao - Director of FDVN Law Firm (Danang Lawyers Association) noted that in litigation involving other offenses or usual legal relationships, identifying the injured party is often simpler due to the direct relationships involved. Consequently, tracing the legal relationships, determining the actions, establishing causal relationships, and identifying the accused and the injured party is relatively straightforward. However, in cases of stock market manipulation, where the manipulation disrupts the state's management order of securities and the stock market, the target of the offense is the stock market in general. As a result, when the market is manipulated, stocks and securities are artificially inflated, leading to investors suffering financial losses when investing in those securities. Moreover, securities trading activities take place in a specialized stock market, involving numerous transactions conducted through securities operations, channels, intermediary methods, and electronic tools. Many legal relationships are established based on electronic methods and internet network systems, making it more complex to determine related legal issues.

Lawyer Le Cao further analyzes: “ In principle, when the offender carries out the six types of behaviors as stipulated in Article 211(1) of the 2015 Criminal Code to manipulate the market, it can lead to losses for investors, and they are considered the victims. However, market manipulation behaviors typically do not occur at a single moment; they can extend over many days and stages. Investors may participate in the manipulation tactics not just once, but repeatedly placing buy orders and then selling, sometimes making profits and sometimes losses. Some even engage in enticing, advising, and instructing others to join in. These transaction developments occur through active protocols via electronic apps or on the websites of securities companies or centers. Therefore, identifying, dissecting, and accurately assessing the position, role, degree of involvement, and legal status of these victims as injured parties in a criminal case is a highly complex matter”.

According to Article 62 of the 2015 Criminal Procedure Code, the victim is defined as an individual directly suffering physical, mental, or property damage, or as an entity or organization suffering property or reputation damage caused or threatened by the criminal offense.

In the prosecution of Stock market manipulation cases, investigative authorities will look into securities manipulation activities, trading orders, and securities transaction histories, and request information from regulatory agencies, brokerage firms, and stock exchanges to identify evidence to prove the crime. This is also the basis for determining the damages and the injured parties to ensure a thorough resolution of the case and to protect the rights of investors who have suffered losses.

However, in reality, in cases of securities manipulation, some investors may profit while others incur losses. Determining who the victims or the injured parties are in a criminal case, as well as assessing the actual extent of damages suffered by investors, is often very challenging.

One of the other reasons comes from the shortcomings of the legal system. Specifically, “Manipulation of securities market” is stipulated in Article 211, Penal Code 2015 as a material crime. Accordingly, the mandatory elements of the crime are objective behavior and the consequences of damage caused by the behavior. Thus, one of the criteria for determining the crime is to establish the consequence as “earns a profit of from VND 500,000,000” or “causes a loss to investors of from VND 1,000,000,000”. However, determining the value of investor damage is also challenging due to the shortcomings of legal regulations.

Currently, although determining the value of illegal income is carried out under Circular 117/2020/TT-BTC dated December 31, 2020, by the Ministry of Finance, which stipulates the method of calculating illegal income, the total amount of income against the law/illegal gains obtained from market manipulation behavior. However, determining the damage to investors depends on the application of the expert appraisal according to the provisions of Circular No. 40/2022/TT-BTC of the Ministry of Finance on forensic appraisal in the financial sector and the Law on Forensic Appraisal of 2012 (amended and supplemented in 2020). The crucial point is that the law has not yet provided regulations or legal guidance for determining the damage to investors who participate in buying and selling securities during manipulated phases.

Moreover, in reality, regarding the amounts "causing damage to investors," not every investor who has suffer from losses wishes to report to the authorities due to concerns about the time-consuming process, fear of impacting their own reputation, or other reasons, such as engaging in multiple stock transactions where the accurate and psychologically acceptable amount of the losses is viewed as a "risks in investment process". Therefore, a portion of the amount "causing damage to investors" is not taken into account. Consequently, in practice, there are many cases where objective behavior is proven, but the actual damage to the investor cannot be determined.

Although, in terms of regulations on legal appraisal, Circular No. 40/2022/TT-BTC has established provisions for legal appraisal in the financial sector as a specific and unique field, there are still no specific procedural regulations related to this appraisal activity, especially concerning the issue of damages caused by manipulated securities transactions. The methods for determining damages, the basis for determining damages, and the timeframe and principles for determining damages related to securities transactions have not been clearly defined, allowing appraisal agencies to use these regulations as a basis for appraisal.

For instance, in the FLC case, it can be observed that the investigative agency also requested an appraisal to determine the amount of damage caused to investors who purchased stocks of the 5 securities AMD, HAI, GAB, ART, and FLC during different periods. However, insufficient grounds were found in the Appraisal Conclusion dated October 23, 2023, by the Ministry of Finance to determine the damages suffered by investors due to the act of "Market manipulation in securities trading." Similarly, in the Louis Holdings case, no recorded damage was recognized. Therefore, the entire amount of over 154 billion VND, illicitly gained by the defendants, was seized by the Court to contribute to the public fund, as analyzed by Lawyer Le Cao.

Recommendations

In criminal cases, alongside the pursuit of responsibility and strict handling of offenders, it is crucial to protect the rights and interests of victims and resolving compensation for damages caused by illegal acts to ensure the fairness and seriousness of the law.

Recent cases of market manipulation in the securities sector have highlighted deficiencies in protecting the rights and interests of victims and addressing compensation issues resulting from market manipulation. As analyzed above, there are various reasons for these shortcomings. One of them is the difficulty in determining and proving the damages suffered by investors due to market manipulation. Particularly, there is a lack of legal basis for determining damages, and currently, there are no regulations or legal guidance for investors participating in buying and selling securities during manipulated periods. This deficiency results in situations where, even if the objective behavior is proven, the consequences of the act (individual or other investors' damages) cannot be demonstrated, leading to violations only being addressed at the administrative offense level. Consequently, there is insufficient basis to address investors' compensation claims, jeopardizing their rights and interests in certain cases.

Based on the practical studies mentioned above, we believe that competent authorities need to urgently conduct comprehensive research to refine legal regulations related to criminal, civil, criminal procedural, forensic appraisal, securities laws, etc. This should particularly focus on improving and supplementing provisions concerning the rights and obligations of relevant parties in cases of market manipulation. Specific regulations regarding the basis, conditions, and methods for determining damages in criminal cases related to the damages caused by market manipulation should be issued.

Lawyer Lê Cao 

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